Dear Shareholders,
In a year where we still faced significant headwinds, FY 2017 was a mixed bag of results for Kulim. Our core Plantation Division benefitted from more favourable weather conditions and improved commodity prices in 2017.

Q : How would you describe the year in review?
ED : In a year where we still faced significant headwinds, FY 2017 was a mixed bag of results for Kulim. Our core Plantation Division benefitted from more favourable weather conditions and improved commodity prices in 2017. Kulim has also implemented Good Agricultural Practices (“GAP”) and enhanced the use of natural organics material, such as using fronds to help in soil conservation and Empty Fruit Bunches (“EFB”) for mulch to retain moisture and return organic matter to soil.

However, it was a tough year for our Oil and Gas (“O&G”) Division and this resulted in lower contribution to Group revenue. The contribution from the Group’s Intrapreneur Ventures (“IV”) Division was insignificant.

Q : In the Chairman Statement indicated that a number of corporate exercises were carried out during the year. Please elaborate.
ED : In 2017, various corporate exercises have been undertaken to strengthen IV Business. On 1 September 2017, three (3) of IV companies, SIM Manufacturing Sdn Bhd, Jejak Juara Sdn Bhd and Kulim Civilworks Sdn Bhd had ceased their operations and became dormant. In another development, Sindora Timber Sdn Bhd had ceased all of its activities excluding oil palm management activities at Sungai Simpang Kiri Estate. Furthermore, on 22 November 2017, Kulim completed the disposal of its entire 76% equity holdings in Classruum Technologies Sdn Bhd (“CRTSB”) to JCorp. As the developer of Classruum.com, a virtual classroom that offers online learning facilities with social media applications, CRTSB is a better-fit for JCorp’s and the Johor State’s educational programmes, named E-Learning Johor, which was launched by the Chief Minister of Johor, YAB Dato’ Mohamed Khaled Nordin on 27 April 2017.

Two (2) corporate developments took place on 28 December 2017. First, Kulim completed the disposal of the 21-storey Menara Ansar at Johor Bahru to Waqaf An-Nur Corporation Berhad (“WanCorp”), a company established to manage the assets and shares of the JCorp Group endowed for waqaf. The Group has opted to dispose its investment in Menara Ansar as it would allow us to unlock the value ofour non-core asset as well as realise our investment in the property. The resulting cash inflow of RM155.78 million including 6% of GST from the sale will be used to repay borrowings and lower our gearing level.

In another development, on 28 December 2017, we completed the disposal of 40,645 hectares of plantation landbank at Central Kalimantan (“BarUt”). The conversion of the BarUt land to Hak Guna Usaha (“HGU”) status has been stalled since 2014. Only 307 hectares have been planted, with no new developments in 2017 owing to resistance from the local authority and lack of clarity on the land status and legal ownership. As an RSPO-certified Group, we take the matter seriously, as we try to strike a balance between the business and sustainability principle. In the long-run, this would affect Kulim’s planting programme and the return on investment. The rationalisation on investment was therefore undertaken as part of our exit strategy to unlock the value of BarUt. With our exit from BarUt, the Group will focus on the development and rehabilitation of our plantation in South Sumatera (“SumSel”), where new planting will commence in stages from 2018.

Q : 2017 has been described by in the media quarters as a recovery year for the Malaysian economy and the Ringgit. Please describe currency movements during the year under review?
HOF : Supported by positive domestic developments, the Malaysian economy is expected to grow by between 5.2% and 5.7% in 2017 (2016: 4.2%). (Source: Ministry of Finance Economic Report 2017/18, pages 3 and 43). The movement of the Ringgit was relatively lethargic during the first half of 2017 and then began to improve aggressively till the end of the year. Bullish foreign funds inflows, improved foreign investments and robust economic growth were among factors that contributed to the strengthening of the Ringgit. The Ringgit traded at RM4.4900/4950 to the US Dollar (“USD”) at the start of 2017 and finished at an all-time high for the year at RM4.0440/0500 to emerge as one of the top performing currencies in Asia. (Source: Malay Mail Online, 30 December 2017). However, the full benefits of the resurgent Ringgit were dampened by our USD-denominated contracts from the Group’s O&G support division.

Q : What were the main external factors that impacted on Group performance?
ED : Challenges were also posed by shifts in the policy stance of the new United States (“US”) administration and following the United Kingdom’s Brexit Referendum. Increasing monetary policy divergence in the developed countries heightened uncertainty for the Malaysian economy, affecting sentiments and labour market conditions. The industry also faced intense competition from other edible oils and fats, especially soybean. Improved biotechnology to increase yields, has progressively lead to a glut in the world’s supply of edible oils/ fats and resultant declining long-term prices. In an increasingly interconnected world, we are also exposed to political risks, either directly or indirectly. Any political instability in Indonesia, for instance, could affect our plantation and O&G investments there.


Q : Against the operating environment that you have just described, how did Kulim perform on the financial front?
HOF : Considering the many challenges in the operating environment, the Group turned in satisfactory financial performance. There was a marginal decrease in revenue from RM1.61 billion registered in 2016 to RM1.54 billion in 2017. However, PBT declined significantly to RM43.44 million from RM59.92 million posted the previous year.

Notwithstanding the results, we were able to deliver RM50 million in dividend payment to our shareholders.

Q : Which was biggest contributor to Group revenue and profitability?
ED : The Plantation Segment remained our main cash cow, contributing RM1.03 billion or 67% of the Group’s revenue. 2017 was a year of abundance for the segment, with 995,129 tonnes of FFB produced compared to only 851,435 tonnes in 2016, an increase of 16.88%. FFB production cycle reached its peak during the months of June to August. As if in synchronisation, prices of CPO began to trend upwards over the same period, soaring to a hefty RM2,900 per tonne during the third quarter. However, CPO prices began to slide in the fourth quarter as supply began to normalise. The Group’s Malaysian operations reported an average CPO price of RM2,852 per tonne for 2017 compared to RM2,532 per tonne for the previous year. The average price of Palm Kernel (“PK”) also improved to RM2,427 per tonne, against RM2,387 per tonne registered in 2016. 

Q : How did the other segments perform?
HOF : Unfortunately, the encouraging results from the Plantation Segment were offset by the below par performance of our O&G support business. Revenue fell from RM626.17 million in 2016 to RM419.71 million in 2017. From a PBT of RM21.03 million in the previous year, the O&G business registered a Loss Before Tax (“LBT”) of RM130.28 million . The decreased in revenue and loss recorded was attributed mainly due to higher costs incurred in the Engineering, Procurement, Construction, Installation and Commisioning (“EPCIC”) project of E.A. Technique (“EA Tech”) against the contracted sum and also increase in administrative expenses. Higher administrative expenses was due to discount on receivables and amortisation of intangible asset for the acquisition of Libra Perfex Precision Sdn Bhd. The strengthening Ringgit against the USD also took a bite at the segment’s financial position by impacting on working capital.

For FY 2017, the Group’s IV Segment generated revenue of RM56.23 million, a decrease of 2.39% from RM57.61 million reported in 2016. PBT also took a downward slide from RM0.705 million achieved in 2016 to LBT of RM1.86 million in 2017.

Q : Please describe Kulim’s balance sheet strength.
HOF : Despite the challenges of its operating environment and negative contributions from some segments, the Group remains relatively strong, being supported by the fixed asset-heavy nature of its business. Our landbank of 65,505 hectares has remained intact even as its value continues to appreciate. In 2017, Kulim also undertook an exercise to restructure RM500 million of its short-term to long-term loans in order to match the expected income from its investments. This has improved the Group’s gross gearing ratio to a manageable 0.41 times (FY 2016: 0.49 times), which is in line with JCorp’s zero gearing target by 2022.

The banks’ willingness to extend their facilities is further testament to Kulim’s robust financial standing and bodes well for its ability to tap the capital markets for additional funds in future, if and when required. As at 31 December 2017, we had a cash balance of RM325.47 million compared with RM530.78 million the preceding year.

Q : A part from the financial numbers, what were the achievements or highlights of FY 2017?
ED : Notwithstanding the challenges of the operating environment, we consider among our achievements and highlights the following:
•FFB production registered a 16.88% increase to 995,129 tonnes, while CPO and PK production rose by 9.74% and 12.91% respectively over the preceding year.
•Achieved an Oil Extraction Rate (“OER”) of 20.44% and a Kernel Extraction Rate (“KER”) of 5.39%.
•The cost per tonne of FFB was lowered to RM251 against the targeted RM290.71, resulting in savings of 13.66%. Correspondingly, cost per mature hectare was lowered to RM6,019.14, representing savings of 0.76%.
•Our five (5) palm oil mills processed a total of 1,467,696 tonnes of FFB, an increase of 9.56% from 2016. Our milling costs stood at RM44.62 per tonne FFB, 7.94% lower than the Group’s own 2017 estimate.
•Already a trail blazer in many areas, our R&D team has developed new high-yielding oil palm clones.
•The Group achieved a Lost Time Accident Rate (“LTAR”) of 3.41, to meet our target of below 10.
•The Biogas Plant at Sindora Palm Oil Mill was completed in December 2017, furthering Kulim’s Sustainability Agenda through the increased use of biogas as an alternative source of energy.
•The Group won no less than five (5) awards for 2017, including the prestigious Global Responsible Business Leadership Award 2017 and Annual Global CSR Summit and Awards Ceremony 2017.
•Kulim continued to contribute to the well-being of the community, disbursing a total of RM7.15 million.

Q : Within the context of “Defining New Perspectives”, does this mean that Kulim has changed its business model?
ED : While the fundamental pillars of Kulim’s business model are sound, our responsible approach to business means we are committed to generate sustainable returns for our stakeholders. As a dynamic entity, Kulim is constantly evaluating and fine-tuning its portfolio to deliver value not only to our shareholder but for all our stakeholders. This means fine-tuning our business model in sync with an ever evolving business landscape. Thus, while our model remains anchored in Plantations, O&G and IV, while Agrofoods and Property Development businesses are gaining new prominence as drivers of growth and profitability.

We need a paradigm shift in our thinking. Fortune favours the bold and we are looking to exploit growth opportunities to derive new revenue streams. We will even venture into uncharted territory, but will only do so within the palm oil business, where we already have a strong competitive advantage that is within our appetite for risks. Our strategy is driven by the factor of low Capital Expenditure (“CAPEX”) investment while maximizing revenue and profits.

Q : The monetisation of assets is a key strategy and FY 2017 has already seen several corporate developments to this effect.  Are there plans for more divestments in the pipeline?
ED : Yes. On 28 December 2017, Kulim completed the rationalization of investment in Indonesia Plantation at BarUt. No further development took place in 2017 due to some resistance from the local authority. The rationalisation is in line with Kulim’s strategy of constantly evaluating its portfolio of investments and where possible, seeking opportunities to unlock the value of its investments.

In the O&G segment, Kulim is targeting to focus development in SWBB PSC with expected to obtain for Plan of Development (“POD”) approval by first half 2018.

The year under review also saw we have ceased the operations of several companies, while rationalising our investment in others. The Group has also earmarked several properties, comprising both land and buildings, for sale to prospective buyers from now until the year 2020.

Q : In “Defining New Perspectives”, the Chairman mentioned that Kulim will be guided by the “Blue Ocean Strategy” and JCorp’s “Intrapreneur 2.0 Programme”. Please elaborate.
ED : The Blue Ocean Strategy was adopted by the 11th Malaysia Plan, in a bid to create a new economic model so that the country will not remain in the middle-income trap. Launched in 2009, the strategy emphasises the optimal use of resources with a focus on high-impact projects that meet the criteria of being high-impact, low-cost, efficient and can be swiftly implemented.

In a similar vein, JCorp embarked on its Intrapreneur 2.0 Programme to establish a stronger foundation in order to elevate the IV business to greater heights. The Programme emphasises meritocracy, financial contribution as a key bottom line and business sustainability. To meet these objectives, JCorp may adopt some of the practices of venture capitals for the programme.

Q : In all organisations, human capital is seen as key to maintaining business momentum and to realise corporate aspirations. How did Kulim fare in this pivotal area?
ED : Developing our human capital is one of our KPIs to enhance organisational capacity and shape our corporate future. For FY 2017, we have invested a total of RM862,184 for manpower development and training which represents 1.48% from total emolument. As a measure of where we stand in striving to be an Employer of Choice, in 2017 our turnover rate was below 5%, a strong indication of the Group’s retention power.

We provide a wide array of training and developmental programmes for staff at all levels. In addition, we offer qualified candidates the opportunity to earn professional qualifications. For 2017, a total of 24 employees were enrolled for various programmes such as the Johor Leadership Programme (“JLP”), Association of Chartered Certified Accountants (“ACCA”) Chartered Institute of Management Accountants (“CIMA”), Certified Internal Auditor (“CIA”), Malaysian Institute of Human Resource Management (“MIHRM”) and Certified Association of Human Resource Manager (“CAHRM”) programmes.

As a future-focused organisation, we recognise the importance of succession planning to ensure a ready pipeline of talents to assume leadership positions, thereby ensuring business continuity and corporate robustness. A talent calibration exercise was completed during the year to identify high potentials for Kulim’s talent pool.

Q : In today’s operating environment, corporations are expected to engage stakeholders to help drive long-term sustainability. How does Kulim view stakeholders’ engagement as the key to a source of competitive advantage and long-term sustainability?
ED : Kulim sees its long-term success closely tied to its interactions with its stakeholders, which include our employees, customers, investors, regulators, local communities, government agencies, financiers, members of the media and Non-Governmental Organisations (”NGOs”), among others. By systematically engaging our stakeholders to discuss matters of shared interest, we draw valuable insights and constructive feedback.

Q : Strengthening corporate governance was among the KPIs for 2017. In April and December 2017, Bursa Malaysia released the new Malaysian Code on Corporate Governance 2017 (“MCCG 2017”). A key feature of the new Code is the introduction of the Comprehend, Apply and Report (“CARE”) approach and the introduction of “Step Up” practices to encourage companies to go further in achieving good corporate governance. To what extent is Kulim complying with the new set of best practices?
ED : Kulim regards good corporate governance as a key element underpinning the sustainable long-term growth of its business. The Board considers strong governance as one of the key strategic determinants in building corporate accountability and competitiveness, whilst achieving its set of corporate and business objectives and ultimately, deliver shareholders’ value while taking into account the interest of other stakeholders.

As such, we subscribe to and fully support the MCCG 2017 as a basis for practices to enhance corporate governance. We are committed to apply all the 36 practices and 4 Step Up practices as recommended in the MCCG 2017. With a few exceptions, which are being addressed, we have to date conformed with all the MCCG 2017 recommendations.

Q : What were the new measures introduced by Kulim during the year to strengthen its corporate culture anchored on accountability and transparency?
ED : Kulim is fully committed to uphold the highest standards of ethics, transparency and good governance. In 2017, we introduced a Policy on Conflict of Interest, which serves to reinforce and provide guidelines on good Corporate Business Principles by establishing non-negotiable minimum standards of behavior in key areas. The Policy was circulated to employees group-wide and briefing sessions were also organised to create awareness. Aligning ourselves with our parent company, we also adopted “JCorp Core Values 2.0” which promotes five (5) key values – Integrity, Professionalism, Innovativeness, Loyalty and Teamwork. These are the foundations on which a sustainable business must be built and must be assimilated into our corporate culture.

Q : Please provide a brief “SWOT ” (Strengths, Weaknesses, Opportunities, Threats) of Kulim.
ED : Corporate SWOT for Kulim as follows:
More than forty years of being in the Plantation Business have given us a pedigree second to none. Although Kulim has many strengths, we consider among our greatest, the Kulim Brand which resonates not only within Malaysia but in the global marketplace. Our Brand is reinforced by our extensive knowledge and experience in the business, backed by strong R&D support, an experienced and professional management team and a deeply-ingrained sustainability-driven culture.

The high dependency on foreign workers poses risks to the country’s palm oil industry. According to the Malaysia Palm Oil Board (“MPOB”), 77% of plantation workers are foreigners. Ageing mills and palms also pose a problem, although the latter is being addressed through a continuous replanting programme in Malaysia to improve the age profile. In 2017, 2,086 hectares were replanted with new high-yielding clones. Limitation of land in Malaysia is not suitable for large-scale of palm oil plantations hampers the future development of this sector.

The oil palm sector is a key component of the Malaysian economy, the Government will continue to facilitate the development of the palm oil industry, especially in value added downstream activities. In a better informed world and as consumers become more conscious about sustainability issues, SPO-certified palm oil products will be a priority for consumers. Palm oil is one of the least expensive and most popular oils world. As a food, it is one of the few highly saturated vegetable fats that does not contain cholesterol. It also enjoys demand from various end-use industries.

Kulim and the industry it is in face a variety of threats ranging from extreme weather conditions posed by the El Nino and La Nina phenomena, manpower shortages and resultant rising costs and competition from other vegetable oils. We also have to contend with increasing discriminatory policies under the sustainability agenda. Any political and/ or social disorder can affect our operations in Indonesia

Q : Looking to FY 2018, what is the business outlook for FY 2018? What will the challenges and opportunities in the operating environment?
HOF : The Malaysian economy is projected to continue its strong growth momentum with real Gross Domestic Product (“GDP”) expanding between 5% and 5.5% in 2018 (Source: Economic Report 2017/18, page 73). The bullish outlook is against the backdrop of the global economy growing by 3.1% in 2018, as  the recovery in investment, manufacturing, trade and commodity prices continues (Source: The World Bank, Press Release, 9 January 2018).

Nevertheless, many of the challenges the Group faced in 2017 will continue into the new financial year. Although the value of the Ringgit against the Greenback continued to rally as we moved into 2018, some economists and fund managers see a confluence of factors that could prove negative for the Ringgit, such as the outcome of the 14th General Elections and a possible slowing of Malaysia’s economic growth.

Q : What is the outlook for Kulim in the coming financial year?
ED : The outlook for FY 2018 is promising. As in the previous year, we have set ambitious yet realistic KPIs for the main areas identified in our Balanced Scorecard. The performance of our core Plantation Segment will remain dependent on CPO prices, which in turn, are subject to supply and demand market dynamics and are also sensitive to stiff competition from substitutes. The segment will also be affected by every rising labour and fertilizer costs as well as increasingly stringent environmental concerns.

However, Plantation has taken steps to ensure sustainability by deploying newer technology, fertilizer substitution, improved field mechanisation, increased on-the-field training to optimize operations and exercise more stringent controllable operational costs. Additional funds will be allocated for R&D in the never ending quest to develop improved planting materials and to explore alternative energy options.

The below par performance of our O&G Segment is only a temporary set-back and is expected to be over with the completion of the EPCIC project by the first half of 2018. No new EPCIC projects will be undertaken in the foreseeable future. With improved operational efficiency and better service quality, the core Floating Storage and Offloading (“FSO”) business is expected to bring the segment back to greener pastures.

Q : What targets have you set for the short, medium and longterm period?
ED : In the short term, within the next year or so, the plan is to fully capitalise on our status as a RSPO-certified mills, a status that we enjoyed since 2009, when we achieved full RSPO certification. In an age when consumer awareness of environmental and social issues has never been higher, RSPO-certified sustainable palm oil fetches a premium. By banking on innovation, we will continue our focus on enhancing efficiencies and cost management. We will also expand our palm oil business footprint into uncharted territory.

Our medium-range plan is to increase the size of the palm oil business to reap better economies of scale, while exploiting opportunities to move further up the palm oil value chain. Plans are also in the pipeline to divest non-performing businesses or to optimise returns on investments. Within our IV Segment, the new emphasis will be on companies that are related to our core palm oil business. We are currently evaluating the viability of both our pineapple growing and cattle rearing projects. To crystalise the value of Kulim’s significant landbank, the first phase of Kulim’s housing project at Taman R.E.M, is expected to be completed by end-2018. Sungai Papan estate has been earmarked for a mixed property development project, while the Sedenak Estate will be converted into the Sedenak Data Centre and Robotic Valley.

Over the long term, the target is to scale up FFB production and achieve year-on-year positive growth in palm product yields and extraction rate. Our long-term vision includes the identification of new income streams via the Blue Ocean Strategy. A raft of financial strategies will be put in place to enhance profitability and ensure more rigorous management of our cash flows towards achieving JCorp’s zero gearing target by 2022.

Q : Kulim was delisted from the Main Board of Bursa Malaysia on 4 August 2016 and became a 100% subsidiary of JCorp. Do the long-term plans for Kulim, include a relisting exercise?
ED : Kulim will continue to evaluate numerous initiatives, business opportunities and proposals. These include a re-listing exercise should the right conditions and opportunities come our way in order to enhance Kulim’s growth and value over the long-term.

Q : What is the biggest contributing factor towards Kulim’s success to date?
ED : Without question, it is the vision and leadership of our commercially-driven management, ably supported by a talented and dedicated pool of employees. Together they make up a formidable team and this will ensure Kulim’s continued progress and sustainable growth well into the future.